There’s a lot to like about publicly-traded companies. There’s the liquidity of the market, the transparency imposed by regulators, and the ups and downs in share price which makes the stock market so fun to watch.
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Going public can have its drawbacks though. As recent cases like Uber’s recent trouncing following hum-drum Q2 earnings results show, Wall Street doesn’t take too kindly to deeply unprofitable companies losing so much money in public. The short attention span of public market traders, and the extremely high velocity of those trades, puts pressure on companies to perform, which could lead to trade-offs which compromise the long-term vision of these ventures.
A Silicon Valley-based stock exchange founded in 2015 by Lean Startup author Eric Ries and lawyer John Bautista aims to ameliorate some of the structural incentives which promote short-term thinking in public companies. Appropriately dubbed the Long Term Stock Exchange (LTSE for short) the new exchange will structure the relationship between corporations and their public-market backers a little differently. Stockholders will be granted more voting power the longer they hold the stock (incentivizing people to buy in early and keep some skin in the game over the long haul) and companies will need to make more public disclosures about their product roadmaps, among other new features.
While the company sought regulatory approval to launch its exchange, LTSE released a number of tools for startups to use, including capitalization table management and cash planning utilities, among others. On May 10th of this year, the SEC approved LTSE’s application to become an exchange, and it looks like Reis and the rest of the company have raised capital for the next phase of their venture: implementing and launching the exchange itself.
A couple of legal entities which comprise the Long Term Stock Exchange filed paperwork with the U.S. Securities and Exchange Commission indicating that the LTSE has raised approximately $50 million1 in new funding as the incipient open market exchange enters the development and implementation phase.
The first filing, by Delaware-domiciled “LTSE Services, Inc.” discloses $49,738,849 in new funding, sourced from 65 investors. With $0 yet to sell, the funding round was fully closed. The filing discloses that LTSE Services Inc. received its first hard capital commitment on August 14th; the document was signed by co-founder and LTSE president Eric Ries today, August 29th. A secondary entity, “LTSE Group, Inc.” disclosed it sold $261,149 worth of equity, also to 65 investors. The filing states that LTSE Group, Inc. was formed in 2019, whereas LTSE Services was incorporated over five years ago.
Rule 506 of Regulation D, the expansive legal framework for private entity fundraising, requires that Form D disclosures are made within 15 days of the date of first sale of securities, like the equity investors purchased from LTSE. Today’s filings met that deadline, but only just.
In the SEC ruling in favor of LTSE’s approval as a stock exchange, the securities regulator explained the ownership and governance structure of the new exchange. LTSE Group, Inc. “will own 100 [percent] of the equity of LTSE and is the entity through which the individual investors who are ultimate owners of the Exchange will hold their ownership interests in the Exchange,” the SEC ruling stated. Regarding LTSE Services, Inc., the SEC states that owners of LTSE Group “also will directly own a separate, affiliated Delaware-incorporated entity, LTSE Services, Inc. […] a software business currently serving approximately 20,000 users, mostly early stage companies.”
The Long Term Stock Exchange raised approximately $18.7 million in Series A funding back in July 2016, according to Crunchbase data and SEC disclosures from the time. Crunchbase data indicates that Floodgate and the now-inactive Lowercase Capital participated in LTSE’s first round. On the regulatory filings for the company’s first round, Founders Fund partner Brian Singerman was listed as a non-executive director. LTSE’s board of directors—consisting of co-founders Eric Ries and John Bautista (who is also a lawyer at law firm Orrick, and co-founded YC-backed Clerky) and the aforementioned Singerman—remains unchanged through this latest round of financing disclosed today.
A February 2019 regulatory filing made by LTSE Group, pursuant to its application with the SEC for approval as an exchange, disclosed that Eric Ries owned approximately 29.6 percent of the venture. Bautista owned 8.9 percent; Founders Fund and related entities owned just under 14 percent; Collaborative Fund owned 7.8 percent (through its third flagship investment fund, Collaborative III, L.P.); and Obvious Ventures owned just under 6.7 percent of the company. As a consequence of the fundraising event disclosed in today’s filings, it’s likely that Ries and Bautista’s stakes have been diluted.
Since Form D filings don’t disclose the names of investors or how much they contributed, it’s unknown whether prior investors maintain their pro rata stakes in the company, or how much LTSE’s equity split has shifted following this round.
Illustration: Li-Anne Dias
$49,999,998 for all you sticklers out there.↩
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